Options Basics Review

What is the primary characteristic of an option contract?

• It obligates the buyer to purchase an asset
• It gives the buyer the right, but not the obligation, to buy or sell an asset
• It always results in a profit for the buyer
• It can only be used for stocks

What happens if you let an option expire without exercising it?

• You gain the full value of the underlying asset
• You lose 50% of your investment
• You lose 100% of your investment (the premium paid)
• The option automatically exercises

Why are options called derivatives?

• They are derived from mathematical formulas
• Their value is derived from an underlying asset
• They are always traded in pairs
• They derive their name from financial jargon

What position do buyers of calls hope for in regard to the stock price?

• Decrease
• Increase
• Remain stable
• Become more volatile

What term is used for people who sell options?

• Holders
• Writers
• Traders
• Brokers

What is the strike price?

• The price at which the option was purchased
• The current market price of the stock
• The price at which the underlying stock can be purchased or sold
• The profit made from the option

How many shares does one standard option contract typically represent?

• 1
• 10
• 50
• 100

What is the premium in options trading?

• The profit made from the option
• The total cost of the option
• The difference between the strike price and market price
• The commission paid to the broker

If you buy a call option and the stock price increases significantly, what is likely to happen to the option's premium?

• It will decrease
• It will remain the same
• It will increase
• It becomes worthless

What is the maximum loss for a call option buyer if the stock price decreases?

• The entire premium paid
• The strike price
• The difference between the strike price and market price
• There is no limit to the loss